SMALL CAPS FOCUS: Forestry resources have big potential for Obtala

The upmarket estate agent Savills produces an annual bulletin on agricultural land values around the world.

Usually, this sort of material is filed under ‘b’ for bin and forgotten about until the next instalment lands on the desk, or in this case, the in-box.

Idle for 10 minutes between appointments I had nothing better to do than a little journalistic due diligence.
What the document revealed is two-fold: first the growing importance of farm land as a valuable investment and, secondly, just how woefully undervalued AIM’s fledgling agri-firms are.

Opportunities: Obtala's plan is to develop both its forestry and agricultural assets to generate potentially significant revenue and profit streams

A case in point is Obtala Resources, which is something of an enigma. The group’s two main investments are in the mining sector. However, its potential, so far unrecognised by the market, is tied to the agriculture and forestry sectors of fast-growing Mozambique and Tanzania.

Around £30million of the company’s £45million market capitalisation is accounted for by significant, but what can be best described as passive, investments. They are iron and tin junior Bushveld Minerals and Paragon Diamonds.

Its major active investment is a 75 per cent stake in Montara Continental, and based on the figures compiled by Savills, the market is valuing Montara’s asset at far less than their real market value.
Its agricultural concessions consist of 43,662 hectares in Mozambique and Tanzania and 410,618 hectares of forestry across five areas in Mozambique.

Pasture land in Tanzania changes hands for more than US$1,500 a hectare, while in Mozambique it is somewhere in the order of US$200. But remember this is pasture land, not irrigated farm acreage, which in Mozambique changes costs just short of US$4,000 a hectare and in Tanzania far closer to US$9,000.

Applying a steep discount to the Savills land prices it is still very easy to value Montara’s share of the 43,662 hectares at well in excess of £20million.
This then says the forestry is in there for free - it is the sleeper.
This is sustainable forestry so Montara may only take 2-4 cubic metres of economic hardwood per hectare, which can be used for everything from rail construction, floors and homes.

Even at a yield of one cubic metre per hectare selling for, say, US$500 per cubic metre, Montara’s forestry assets are worth US$200million.

However, the land positions in Mozambique and Tanzania haven’t simply been bought as buy and hold-style investments.
The plan is to develop both the forestry and agricultural assets to generate potentially significant revenue and profit streams.

The company will harvest and export the sort of hardwoods that might find their way into high-spec engineered floors and decking.
With this in mind, containers are headed for Europe and Indonesia with the aim of creating products with a ready market here in the West.

Obtala at a Glance

AIM code: OBT

Value: £45.5million

Current price: 17p

Year high: 35p

Low: 13.5p

Mozambique’s developing economy (driven by giant gas discoveries in the north and mining within the interior, Tete region) mean there is a huge domestic demand for hardwoods. Montara has a rail sleeper contract, and is hopeful of landing more work.

There may also be opportunities in the booming building sector. Indeed, it is possible domestic contracts could cover the costs of the forestry business with exports creating the value added.

A back of the envelope calculation suggests Montara could break-even as early as the middle of next year, which would provide very early vindication of the business model.
This would be a remarkable achievement for a company with only the shortest of track records in the sector.

‘We only started at the tail end of 2011 with agriculture and mid-way through 2012 with timber,’ said managing director Simon Rollason points out.

‘Yet it [forestry] is already generating revenue that is covering its costs and has allowed us to make capital expenditure.’

In Tanzania the plan is to have 2,000 acres of land under cultivation by the end of 2013.
Montara plans to trial a number of high value crops including tomatoes and chillies along with the grounds nuts.
Ground nuts have been chosen because they provide two crops a year with irrigation.

Rollason estimates the group might be able to generate 4 tonnes per hectare a year of ground nuts that could sell at US$2,000 a tonne.
With cash costs per hectare of US$5-700 there is a rather significant profit margin to be made.

‘We have a clear idea of what we want to do,’ concludes Rollason.
‘We have to demonstrate that we can do it. Then we can take this company to the next level.’

Ian Lyall writes for Proactive Investors. For more on the market's most exciting growth stocks, go to proactiveinvestors.co.uk